Meaning
Contractual commitments by a seller to compensate an acquirer for pre-closing tax liabilities identified during transaction diligence allocate known risks between the transacting parties. This provision, known as a specific tax indemnity, covers designated exposures such as pending transfer pricing audits or unpaid local business taxes. It operates independently from the general indemnity basket.
Risk Allocation
Direct allocation of known exposures ensures that the buyer does not pay for the historical tax errors of the target company. Unlike general representations, a specific tax indemnity is not subject to a deductible or a minimum claim threshold. The seller must reimburse the buyer for every dollar of the specified tax loss.
Claims Mechanics
Triggering the indemnity requires the buyer to notify the seller when a tax authority commences an investigation into the covered issue. The agreement specifies who has the right to defend the audit and negotiate with the tax agency. This division of control prevents the seller from settling a claim on terms that might harm the buyer’s future operations.
Often, the buyer retains the final decision-making power while the seller covers the costs.
Liability Cap
The financial limit on these claims often extends to the full purchase price of the transaction. This high limit reflects the serious nature of tax liabilities. The protection remains active until the expiration of the statutory limitation period.
